To “trade on” or not to trade – Part 2


Often business owners are faced with a myriad of issues that can lead to insurmountable financial pressure.  They know their business and often consider it to have significant value as a going concern.  However, the financial issues are challenging to overcome and often threaten the business’s continued existence.

Trading on to sell

One way to try and salvage some value for the business and get creditors a better return is to appoint administrators to trade on the business for a short period to market the business for sale as a going concern.

However, despite the owners’ hopes and for many and varied reasons, some businesses cannot be realised.  To date, the costs and expenses of trading on have been pro-rated between secured and unsecured assets.  This position has been pushed by regulatory and government bodies such as FEG, which pays employee entitlements.

Such a position has also given administrators some comfort in that at least the costs they were exposed to had some prospect of being paid due to the existence of assets (secured or otherwise). Moreover, the existence of such assets often underpinned the decision of whether an administrator trades on the business or not.

It must be borne in mind that in the administration process, the primary objective is the continuation of the company’s existence.

The benefit

There is no controversy that a going concern sale achieves a greater return than a forced sale of the component assets of the business.  Therefore, such a sale benefits all creditors.  If such a sale is successfully concluded, then the administrator is able to pro-rata costs against the secured assets.

The Atlas case

However, in a recent development (May 2022), Chief Justice Hammerschlag of the New South Wales Supreme Court delivered a judgement important to both secured creditors and insolvency practitioners in Volkswagen Financial Services Australia Pty Ltd v Atlas CTL Pty Ltd (Recs and Mngrs Apptd) (In liq) [2022] NSWSC 573 (Atlas).

The Atlas case involved the administrators trading on a vehicle rental business in circumstances where the main assets (the vehicles themselves) were secured by way of a fixed charge to a range of vehicle manufacturers.

When the administrators failed to secure a going concern sale, the Court refused to allow the administrators to recover their costs and remuneration in respect of the administration via an equitable lien on the vehicles.

On the face of it, this would appear to be fair enough, as the assets were equitably owned by someone else, therefore they should receive the benefit of all the proceeds.  However, this belies the fact that if the administrator were successful, the secured creditor would have taken the increased recovery.  Still, we do not want to underpin the cost of such a chance of recovery. 

Such a decision could have far-reaching consequences as to whether administrators trade on a business to try and achieve a going concern sale, as they take all the downside risk with no upside reward.   This could render administrations impotent as a restructuring or better recovery tool for insolvency practitioners.  Instead, it turns this form of insolvency administration into a more expensive liquidation process.

Administrators are personally liable for any costs they incur in trading on a business.  The only purpose to trade on is to get a better return to creditors.  If administrators are denied this opportunity, then trade-ons may become rare.  Administrators need to be able, within reason, to rely on a certain amount of lien over the company’s assets, as any going concern sale is likely to benefit all creditors.

The Universal Distributing principle

This lien asserted in Atlas by the administrators was on the basis of the “salvage” or Universal Distributing principle (named after Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171).

The Court held in this instance that the Universal Distributing principle did not apply to the administrators’ claims because:

  • the administrators’ claims for costs and remuneration during the administration did not have any connection with the proceeds of the vehicles;
  • the administrators’ decision to trade on was not reasonable in the circumstances;
  • the efforts of the administrators were not directed to the preservation of the vehicles (but rather to the preservation of the goodwill of the broader business); and
  • the administrators did not prove that the amount of costs and remuneration was incurred exclusively in connection with the care, preservation or realisation of any particular asset.

The Atlas case highlights the risks of administrators trading on a loss-making business, where the assets of the business are encumbered and they have no indemnity. If a sale of the business is not achieved in such circumstances, the administrators will find it very difficult to recover the costs they have incurred in, or their remuneration relating to, the general trading of the business.

Whole of business sale

Importantly, the circumstances in the Atlas case should be distinguished from a whole of business sale.  Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68 demonstrates that an administrator is entitled to assert an equitable lien against the proceeds of a whole of business sale ahead of a prior fixed charge, provided the relevant costs and remuneration has been incurred in achieving that sale.

In those circumstances, it would be inequitable for the secured lender to “sit back” while an administrator works to achieve a sale for their benefit, and then refuse to meet the administrator’s reasonable costs and remuneration.

Alternatively, if the business is restructured by way of a deed of company arrangement, administrators will usually require that their costs and remuneration are payable as a first-ranking distribution from the deed fund.

We at dVT Group are experienced in trade on matters and have successfully traded on many marginal businesses and effected a sale for the benefit of creditors. 

If you would like to discuss any issues your clients may be facing confidentially, feel free to give us a call to discuss.  Contact dVT Group on (02) 9633 3333 or by email

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.